Wall Street pros haven't bought into the Etsy (ETSY 0.34%) rebound story yet. The e-commerce platform's stock, which had seen huge gains during the pandemic, is down sharply so far in 2023 even as the tech-heavy Nasdaq Composite has soared.
There are some good reasons for that underperformance, including the fact that Etsy's sales volumes have barely budged over the last few quarters. Profit margins are much lower than they were two years ago, too.
Yet the platform is growing, and Etsy has a good shot at boosting annual earnings with help from rising buyer fees. Against that mixed backdrop, let's take a fresh look at whether the stock is a buy today.
Reasons to buy
Investors don't have to stretch to see reasons for optimism around this business. Sure, Etsy reported another quarter of declining sales volumes in the first quarter. But its marketplace revenue is still far higher than it was before the pandemic. And Etsy returned to modest growth in its buyer pool this past quarter, with its 1% uptick standing out compared to eBay's 7% decline.
Etsy's financial trends are encouraging, too. It collects fees of over 20% on sales that merchants make on its platform, and profits are also padded by its growing advertising business. Wins here allowed revenue to rise 11% last quarter despite slightly weaker sales volumes.
Reasons to pass
On the other hand, Etsy reported weak expansion in its buyer pool this past quarter after that key metric declined in every quarter since late 2021. It's hard to see a path toward strong growth in this business without a more aggressive rebound on this front.
ETSY Operating Margin (TTM) data by YCharts
And Etsy's profit margins are moving in the wrong direction. A 14% spike in operating expenses last quarter helped push net profit down to 12% of sales from 15% a year ago. eBay enjoys a far higher margin of more than 22% of sales, in contrast. The bullish thesis for Etsy's stock sees the company eventually matching or surpassing its peers on profitability. To date, there's little evidence to suggest it can achieve this ambitious goal.
Wait and see
The risks seem to outweigh the benefits for this growth stock right now. Etsy's potential is there, and engagement is much stronger on the platform than it was in the pre-pandemic days. But its long streak of weak sales trends, plus declining profitability, translate into significant risks that operating trends will remain unimpressive.
There's no question that the stock's valuation is much more reasonable today. Investors can buy Etsy for roughly 4 times annual sales, down from a recent high of over 15. Yet the stock is still valued at a premium compared to eBay, and there's a chance the valuation will decline further if there's continued delay in management's rebound hopes.
There will be more clarity around the business when Etsy announces Q2 results in late July. In the meantime, investors might want to simply watch this stock until they see signs of accelerating sales growth trends and stable profit margins.
